Bitcoin (BTC) was created after the financial crisis in 2008 and was set to tackle problems as a result of loose monetary policy. The creator of cryptocurrency Satoshi Nakamoto said in late 2008 that the supply of cryptocurrency is increasing “in the planned amount”, which “does not necessarily lead to inflation”.
The inflation rate of the cryptocurrency has been set, and the circulating offer is limited to 21 million coins, which are expected to be recovered by the year 2140. By that time, the Bitcoin inflation rate will fall to zero. On the other hand, there is no limited access to paper currency, and it can be printed to adjust monetary policy.
Expansive monetary policy, such as that pursued in most countries in the world in recent years, aims to expand the money supply by lowering interest rates and attracting central banks to quantitative easing.
For a long time, this expansionary monetary policy was assumed to lead to higher inflation, which was defined as a decline in the payment mechanism amid rising prices for goods and services. In November, US inflation rose to its highest level in 30 years, while eurozone inflation reached its highest level in 25 years when data were collected.
Cointelegraph contacted several industry experts to comment on these figures, and almost all pointed to expansive monetary policy. In an interview with the Cointelegraph, Chris Klein, COO and co-founder of the Bitcoin IRA crypto-retirement platform, said that inflation is not volatile and is forcing people to “look for options to protect their assets.”
Klein noted that while gold and real estate were strong alternatives, real estate prices are now “off the list” and gold “out of the reach of the average American.” He added that bitcoin is now part of an “inflation hedge” because the supply of bitcoin can not be controlled in the same way as the supply of fiat currencies.
Martha Reyes, head of research at the cryptocurrency exchange Bequant, spoke to Cointelegraph, noting that the market has reacted quickly to the latest inflation data, and assessed potential interest rate increases from central banks. According to Reyes, “the main reason for such high inflation rates is the large increase in the money supply, because the pandemic has created trillions of dollars of new money.”
Historically, gold was used as a hedge against inflation. Bitcoin and other cryptocurrencies are often referred to as “Gold 2.0” because they have features that can make it a digital version of the precious metal.
Cryptography as a solution to inflation
Cryptocurrencies are known for their extreme volatility, with disruptions of up to 50% occurring over short periods, even for premium cryptocurrency groups. This type of volatility has led many to question whether Bitcoin and other cryptocurrencies can be a viable inflation hedge.
In a note sent to customers, strategists at Wall Street banking giant JPMorgan suggested that a 1% portfolio allocation for bitcoin could act as a hedge against volatility in traditional asset classes. Billionaire investor Carl Icahn has also supported BTC as a hedge against inflation.
Adrian Collodi, founder of the non-existent decentralized exchange Domination Finance, reiterated in a conversation with Cointelegraph Klein’s view that bitcoin is the answer to inflation, but noted that there are other ways to hedge against inflation in the crypto space.
Dix cited the decentralized financial sector (DeFi) as a viable alternative. He suggested that by taking advantage of stablecoins – price-controlled cryptocurrencies – and decentralized applications (DApps), investors could “circumvent inflation” by resisting “spot risk”. To do this, they only need to find a way to earn interest on their stablecoins. . which exceeds the annual inflation rate. Floors sa:
“The best way to look at this is that cryptocurrency gives you the flexibility to control your money in a variety of ways, instead of having it controlled by the federal government.”
Reyes noted that Bitcoin is “more attractive as a valuable asset than other commodities assets,” where increased demand can only be met by higher prices, not additional production.
Børsen’s head of research added that the cryptocurrency is in an “early adoption stage”, which means that it “is not closely correlated with other assets, and the increase should be due to halving cycles and growth” from the network.
She added that Bitcoin, as such, is more resilient in the face of an economic downturn, but in the event of a sharp market sale, it will probably also suffer in the beginning as some investors cut their positions across the board.